IRS Tax Audit Manual for the Placer Mining Industry
The SECRET IRS Tax Audit MANUAL written specifically for Internal Revenue Service Audit Agents to use while conducting audits of the Placer Mining Industry.
Placer mining is a special open cut method for exploiting deposits of sand or gravel containing workable a mounts of valuable minerals. Native gold is the most important placer mineral, but platinum and tin are also found in gravels. Minerals also include zircon, diamond, ruby, and other gems.
This selection of IRS Tax Audit Manual for the Placer Mining Industry represents a guideline for the examinations of taxpayers in the Placer Mining Industry. This guide focuses on small mining operations represented as sole proprietorships on Schedule C, but it can be adapted for partnership and corporate returns.
Why The Placer Mining Industry Is A Target?
Major operators produce the bulk of gold recovered and refined, but small-scale, independent miners make up the majority of the tax returns filed. Mining has historically been a cash-based activity. Often the miner will have little, if any, documentation to support the activity. If there are records, they are often disorganized. Hand-written receipts are common. This guide addresses some specific problem areas encountered in the examination of the smaller mining operations, with emphasis on the placer miner.
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The Current Tax Law
Under current tax law, exploration and development expenses can be deducted in full in the year they are paid or incurred. The expenses must be recaptured in the year that the mine goes into the producing stage or upon disposition of the property. In reality, few miners ever claim to be in the producing stage, disposals are seldom reported, and it is unlikely that proper accounting for the recapture of expenses will be found. In the past, taxpayers have deducted large mining losses with little or no recourse by the Government. IRC Section 183 has strengthened the position of the Internal Revenue Service in holding that a miner must be in a trade or business or engaged in an activity for the production of income with the objection of making a profit in order to claim mining related expenses such as those for exploration and development.
There’s A Problem…
The small miner usually claims a Schedule C loss created by deducting exploration and development expenses with little or no mining income. The miner claims to be in the exploration or development stage when, in fact, gold is being produced and sold. The examiner will generally find that the expenses are related to the extraction of gold while the sales of gold are not reported.
The miner may be required to maintain a mineral inventory and claim cost-of-goods sold, including the costs necessary to clearly reflect income following the matching of income and expenses principal. Examiners should verify the mining stages, search for unreported income, and confirm the existence of an inventory. Most expenses will be found to be either direct or indirect mining costs which should be included as part of cost-of-goods sold. As a result, mining losses can be reduced by either increases to income or the decreases in deductible expenses or both.
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This Is The ACTUAL Manual Used To Train IRS Audit Agents in the Placer Mining Industry.
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